This loan agreement is dated [Insert date].
It is made between:
- 1. [Insert borrower name] whose registered office address is [Insert registered address] ("Borrower").
- 2. [Insert lender name] whose registered office address is [Insert registered address] ("Lender").
- 2.1 The Lender has agreed to lend to the Borrower the amount set out in the Schedule ('the Loan'), and this agreement contains the terms of the Loan. It includes details of the interest to be paid, and explains what the Lender can do if the Borrower does not repay the Loan. It also explains what happens if the Loan is not repaid and is instead converted into shares in the Borrower.
Loan and other services
- 3.1 The Lender agrees to lend the Loan to the Borrower on signature of this agreement and on the terms of this agreement.
- 3.2 The Borrower agrees to use the Loan for the purpose described in the Schedule but the Lender does not have to check that it is being used in this way.
Also included in this document:
7. The Borrower's Obligations
8. Events of Default
9. Conversion of the Loan into Shares
Tip Sheet for Funding Agreements
When you negotiate for investment at an early stage, it is normal for a "term sheet" to be negotiated with the investors. The conditions you agree to now will influence the whole life story of the company, so it's useful to get advice at this stage covering issues like shareholder controls going forward.
Any investor or buyer will want to perform diligence before completing the transaction. This means that they will want to look at key financial records and accounts, existing contracts with customers, suppliers and employees, and corporate records. The better and more complete your documentation is, the more inclined they will be to agree with your valuation.
When you offer shares to investors or purchasers you may be making what the law calls "a financial promotion". There are complicated rules about what you can and cannot do. If you don't follow these rules you could end up with the transaction being set aside - or worse still you could face criminal penalties. This is one area where it pays to take advice.
Whenever you take in investment your control over the company will decrease. It's important to think this through at the time and look carefully at any proposed restrictions. For example do they restrict you from raising further money? Or entering into particular types of contract? Or changing the business? Are these controls customary for this kind of transaction? It's worth checking...
Share Holder Rights and Dilution
Investors will often ask for favoured or preferential treatment when it comes to looking at a sale of the company, paying dividends or liquidating the company. They may also try to make sure that their share ownership is not diluted in the event of subsequent investment. You need to carefully consider these provisions when they come up, as agreeing to them may put off other investors who come in during later rounds of investment.
Providing Accurate Warranties
You will be asked to make all sorts of promises or “warranties” in any funding document. It may be tempting to take a “seat of the pants” attitude to these promises, but you could open yourself up to criminal or civil legal action if you make statements which are misleading or not accurate. So, it’s worth making sure that anything you say in the funding agreement can be backed up with financial or documentary evidence.
This is the most important moment for any SME. You want to be able to control it – but larger investors may try to say that they have the right to force or block a planned exit. Are you happy with this? Equally you need to be able to make other minority shareholders sell if you are sure that the exit moment has arrived. These are critical provisions to address in a funding agreement.
What Happens if you Leave?
Investors may well require provisions for the management team, which mean that if they leave the Company, they have to give up all their shares or sell them at a reduced value – particularly if they leave under a cloud. So, these provisions require careful scrutiny – you don’t want the value you have worked so hard to create to be taken away from you.
LawBite Legal Advice
LawBite professional advisors can help you straightaway with all of these issues and more. Just go to the the Legal Advice section and make your enquiry. We’ll get back to you within 24hrs with a meaningful response.
Hannah Ives is a highly experienced corporate and commercial lawyer who has worked in both private practice and in house. In private practice, she worked on public and private company transactions including company reorganisations, share and asset sales, refinancing, public company work/listings and private equity deals.
More recently, Hannah was Head of Legal at Nord Anglia Education, an International Schools business, where she was responsible for the group’s global legal activities. She worked on corporate matters for the group and also handled issues such as tenders, establishing schools in new jurisdictions, commercial contracts, licensing, IP, company secretarial matters and managed relationships with external law firms (a role which gave her valuable insight into a client’s objectives when purchasing legal services).
Hannah is qualified in England and Wales but has wide ranging experience of cross border transactions and has worked on legal matters in China, Russia, South Korea the UAE and various European jurisdictions. She has significant experience of preparing businesses for sale, including preparation for an IPO on the New York Stock Exchange.
Hannah has also established and successfully run two small businesses herself while taking a break from the law to have children, so has first-hand experience of some of the issues and the pressures facing new enterprises.
Throughout her career Hannah has enjoyed working with entrepreneurs, business owners and managers to help them minimise risks and optimise value by providing proactive, commercial and solutions orientated advice.
In her own words:
“I get immense satisfaction in supporting businesses of all types develop and grow by looking to foster close relationships with clients, which allows me to deliver tailored and appropriate advice”.
- LLB (Hons) degree from the University of Manchester (2:1)
- LPC – Manchester Metropolitan University (distinction)
- Preparing a private business (from a legal perspective) for listing on the New York Stock Exchange.
- Implementing a standard form legal review and advice process for business tenders to help provide appropriate cost effective legal support at tender stage.
- Negotiating and completing service agreements with government bodies in the UK and overseas.
- Negotiating and establishing joint ventures to operate new businesses both in the UK and overseas.
Hannah enjoys the great outdoors both with and without her family. She regularly goes walking and mountain biking in the Lake District and enjoys running to keep fit. She is currently training for her first triathlon!
Hannah has also trained as a counsellor and volunteers at Childline once a week to provide counselling sessions to children and young adults.
Step By Step Guide
When To Use this document:
This document operates with the Conversion Agreement. Together they create a structure which means that you can grant a loan and agree that the loan can be converted into shares in the company if certain conditions happen - for example, after a period of time or on the happening of a particualr event, like failure to repay the loan. Once the conversion into shares happens, the loan stops being repayable.